UK households most pessimist about finances in six months amid fears of early rate rise

UK households felt under increasing financial pressure in July and expected their finances to deteriorate over the coming year, a new survey has showed.

Fears of an early rise in interest rates are behind the decline financial confidence, according to the Markit Household Finance Index.

The index, which measures households’ perception of their current and future financial situation, fell to 42.1 in July from 42.6 in June, the lowest in six months - a reading below 50 indicates pessimism.

British households said this was the worst time to make a major purchase than at any time since the beginning of the year, according to financial data firm Markit, as they were at their most downbeat about their savings in six months.

July figures: UK households were at their most downbeat about their current financial wellbeing in six months

Jack Kennedy, senior economist at Markit, said that households’ deteriorating perception of their finances could be due to fears of a rise in interest rates.

He said: ‘UK households reported a weaker assessment of their financial situation in July.

'The survey’s main barometer slipped to a six-month low, while the future expectations index also fell, perhaps reflecting caution regarding the possibility of an interest rate rise before the year’s end.’

Low-income households were particularly downbeat, while the wealthiest gave the brightest assessment on record, Markit said.

Recording households' expectations about their financial situation over the coming 12 months, the index showed confidence was at its lowest since January. However financial pressures remained less severe than at any time in the five years before 2014.

Mr Kennedy said: ‘Moreover, easing inflation perceptions and strongly rising levels of workplace activity suggest that certain pressures on households may be abating, which could help offset the impact of higher mortgage costs following any action by the Bank of England to hike rates.’

The news come as official figures published yesterday showed consumer price inflation rose unexpectedly to 1.9 per cent in June from 1.6 per cent after falling to a four-and-a-half year low of 1.5 per cent in May. The rise was driven by a surprise increase in food and clothing prices.

The jump in inflation could pile fresh pressure on the Bank of England to raise interest rates as higher interest rates are typically used to curb inflation, although CPI inflation is still below the Bank’s 2 per cent target, making it Britain's longest stretch of low inflation for nine years.

But further pressure on the Bank of England over interest rates came from official data released today which showed unemployment rate fell to its lowest level since late 2008 – although pay growth was weaker than expected.

The Office for National Statistics said the UK jobless rate fell to 6.5 percent between March and May, in line with forecasts and down from 6.6 percent a month earlier.
The Markit index found an improvement in Britons’ perception of their workplace activity, but recorded a fall in job security and income.

Howard Archer, chief UK and European economist at IHS Global Insight, said: 'Following on from the rise in consumer price inflation to 1.9 per cent in June, the further marked drop in unemployment will likely fuel expectations that the Bank of England will be raising interest rates before the end of 2014.

'However, ongoing very low earnings growth and some recent signs that growth could be losing momentum highlights the fact that any interest rate hike this year is far from a done deal.'